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Good but could do better - FMA message to financial advisers and salespeople

​The Financial Markets Authority (FMA) report for the June 2014-2015 year on Authorised Financial Advisers (AFAs) and salespeople finds that - while compliance with the expectations of the Financial Markets Conduct Act (FMCA) and the Financial Advisers Act (FAA) is good - there is room for improvement.

Key themes

FMA is satisfied that the vast majority of AFAs are committed to taking their obligations seriously and has indicated that it will continue to pursue constructive engagement rather than a sanctions-based approach, although it will intervene where necessary - and has referred two AFAs to the disciplinary committee as a result of issues identified through its monitoring role.

It has identified four broad themes for attention.

Putting the customer’s interests first

FMA says that, while it saw some excellent practices, many businesses were unable to demonstrate how they balanced conflicts of interest (e.g. staff incentives vs customers’ interests) or how they helped customers to make an informed decision based on a product’s risk profile.

In some cases, the documentation in a customer file focused only on the benefits of the financial product being advised on. Financial advisers must provide a balanced risk/benefit analysis of products.

Governance and culture

Many businesses could not demonstrate how the ‘tone from the top’ influenced firm culture.

FMA expects directors and senior management to have a sound understanding of the key risks faced by the business, particularly those relating to sales and advice. The board should verify that the business has appropriate processes that identify and manage potential and relevant risks.

Further, FMA found that good policies were not always reflected in good processes and staff did not always understand the value of such processes.

Compliance

Many businesses lacked comprehensive systems to ensure compliance, and there was often a lack of oversight over the suitability of decisions made by frontline staff.

FMA expects organisations to have formal procedures designed to find systemic issues and deal with them. This should include staff training, and may also include listening to calls, sampling calls, sampling files, and monitoring sales processes.

Supervision and reporting

Recording and reporting of information was inconsistent. In particular, few KiwiSaver providers collected and recorded useful data on sales or transfers (including whether those were ‘information-only’ or with advice) and reports to management were mostly preoccupied with sale volumes.

The findings are based on 47 separate site visits during the year, as well as desk-based reviews, across banks, insurers, fund managers, trustee companies and individual adviser businesses.

FMA also reviewed data from ten KiwiSaver providers, accounting between them for 81% of KiwiSaver members and 75% of funds under management. This showed that for every 1000 sales or transfers, only three were recorded as having been sold with personalised advice.

KiwiSaver

The FMA notes that many KiwiSaver providers have found its October 2012 guidance on the sale and distribution of KiwiSaver and on the use of personalised advice to be impractical. It has undertaken to review this advice early in the New Year to ensure it reflects the reality of how people engage with KiwiSaver and to ensure that providers have a clear understanding of the FMA’s expectations.

Industry will welcome this initiative, although it will be interesting to see how it ties in with the broader review of the FAA regime which is now underway (refer Chapman Tripp’s commentary).

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